Monetary Policy Flashcards
7 cards from real AP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Monetary Policy flashcards as text
An increase in the money supply, all else equal, shifts the money supply curve and causes the equilibrium interest rate to:
Answer: Fall
Greater money supply means more loanable funds available, driving down the price of borrowing — the interest rate.
Which of the following is NOT one of the Fed's traditional monetary policy tools?
Answer: Setting federal income tax rates
Tax rates are a fiscal policy tool controlled by Congress and the President, not the Federal Reserve.
The Federal Open Market Committee (FOMC) meets approximately how often each year?
Answer: 8 times
The FOMC holds 8 scheduled meetings per year to review economic conditions and set monetary policy targets.
If the Fed wants to decrease the federal funds rate, it will most likely:
Answer: Buy Treasury securities
Buying securities injects reserves into banks, increasing the supply of overnight funds and pushing the federal funds rate down.
Quantitative easing (QE) differs from conventional open market operations primarily because:
Answer: QE involves purchasing long-term or riskier assets, not just short-term Treasuries
QE expands the Fed's balance sheet by purchasing mortgage-backed securities and long-term bonds to lower long-term rates when short-term rates are near zero.
In the short run, expansionary monetary policy is expected to:
Answer: Increase real GDP and raise the price level
Lower interest rates boost investment and consumption, shifting AD right and increasing both output and prices in the short run.
Which best explains why monetary policy has an 'inside lag' that is shorter than fiscal policy's?
Answer: The Fed can change rates without legislative approval
The Fed's Board of Governors can change monetary policy in days, while fiscal changes require lengthy congressional debate and passage.